A recent U.S. Supreme Court decision that has been hailed as a victory for tax collectors could also be a blow to small businesses. If you conduct online sales to out-of-state customers, you need to start paying close attention to laws regarding sales/use taxes (SUT) in every state where you do business.
The backstory to the landmark case, South Dakota v. Wayfair, stretches back decades. In 1967 the Supreme Court ruled that mail-order companies had no SUT obligation on out-of-state transactions. In 1992 the Quill Court decision upheld the physical presence standard for SUT nexus.
Before the Wayfair decision, the same laws governing mail-order sales also applied to sales made through the internet. In other words, if you ran a business in California that made online sales to New York residents, you weren't obligated to collect New York sales tax because you didn't have a physical presence (or "nexus") in that state.
The new ruling signals an abrupt about-face. In its verdict, the Supreme Court noted that a quarter-century ago, it "could not have envisioned a world in which the world's largest retailer would be a remote seller," an obvious reference to Amazon.
A Big Problem for Small Businesses?
The irony of a ruling prompted by the emergence of Amazon is that Amazon is already largely in compliance. The company collects sales tax in states where it's required to and has launched a service called Marketplace Tax Collection to assist Amazon Marketplace sellers. And even Wayfair, the online home-goods retailer that was the defendant in the landmark ruling, basically said losing the verdict was no big deal, noting it already collects sales tax on about 80% of its U.S. orders anyway.
But while large online retailers have the resources to roll with the changes, small businesses could be caught short. That's because the ruling leaves it up to individual states, and possibly even local governments, to determine the threshold for collecting sales tax.
"The Wayfair decision changes everything we thought we knew about SUT nexus," writes Suzanne Beaudelaire, a tax consultant from the Los Angeles area. "Now it will be necessary to check each state's nexus statute to determine what activities create SUT collection and filing obligations there, because physical presence is no longer the bright line nexus standard for SUT."
In South Dakota, the battleground for this ideological showdown, the state can enforce collection of SUT on any business with annual taxable sales of at least $100,000 or with 200 individual sales transactions — a pretty low bar for many businesses. Other states currently have limits as high as $500,000 … at least for now. There's nothing to prevent a state from enacting a law that says it can collect SUT on all sales made to its residents. All of which means that small businesses — such as our hypothetical California retailer making online sales in New York — must monitor tax laws not only at home but also in the 49 other states.
"Currently, we know of six other states that had already adopted the South Dakota model," Beaudelaire writes. "Other states are expected to quickly follow suit by introducing similar legislation to cash in on this ready revenue source."
Like It or not, Here It Comes
In other words: If you aren't already using outsourced bookkeeping and tax-consulting services that are competent in this area, it's imperative that you start.
No getting around it: If your business conducts ecommerce beyond the boundaries of the state where you're physically located, this ruling will affect you. "Businesses will need to register and file SUT returns in many more states than they currently do," Beaudelaire adds. "That means they will also have increased costs for SUT technology and services, including taxability consulting, return compliance and eventually audit defense."